Urbanization in China

by John Quiggin on June 16, 2013

The NY Times has an interesting, but unsatisfactory, article, on government attempts to promote urbanization in China, with a target of 70 per cent by 2025. The story is mostly about farmers whose land has been acquired by fiat, which fits into well-established journalistic frames. The bigger issue, buried right near the end, is the fact that, under the hukou system of registration, people classed as rural can’t legally live in the city. So, while about 35 per cent of the population is legally urban, the true figure is more like 53 per cent. That makes nonsense of the figures quoted at the beginning of the article, and the suggestion of forced urbanization on a historically unparalleled scale. In reality, the announced target implies a modest slowdown in rural-urban migration, which occurred despite official disapproval.

The big question, at least from the viewpoint of rural Chinese, is whether China can shift to a universal social welfare and retirement income system to replace the workplace-based system of social welfare, of which hukou was part, and which made sense with comprehensive state ownership. This topic is touched on in the NYT article, but in a fragmentary and confusing way, and it’s one about which I know little. I’d be grateful if anyone could point to a more comprehensive treatment.

From an Australian point of view, the continued construction of high-rise apartment buildings, highlighted in the article, is a big deal, since it drives much of the demand for steel, and therefore iron ore and coking coal, that has underpinned our amazing run of good economic fortune, along with the willingness of both Australian and Chinese governments to implement large-scale fiscal stimulus at the time of the global financial crisis.

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Pranab Bardhan argues that restoring small landholders’ rights at the beginning of the reform era was a major cause of the elimination of absolute poverty, perhaps more important than the globalization of the economy. So obviously how this program works out is of crucial importance:

“The coming urbanization plan would aim to solve this by giving farmers a permanent stream of income from the land they lost. Besides a flat payout when they moved, they would receive a form of shares in their former land that would pay the equivalent of dividends over a period of decades to make sure they did not end up indigent.”

In the Precariat Guy Standing makes an interesting point that residents in so many countries are denizens, not citizens; and even citizens find their status defacto converted into one of denizenship. The hukou system has made denizens of many Chinese immigrants. It seems possible that eclass conflict will take place not only on the factory floors but in the political realm over the rights of denizens.

Regarding the urbanisation issue – I was teaching business English in Guangzhou in the late 90’s – and my students would tell me with a straight face that they wished the government would wall off Guangzhou and the other coastal cities to keep the farmers out. Not such a crazy idea when you realise that HK is walled off from the mainland.

At one point we travelled down into the region of Xingshuang Banna, on the Burmese border (while the main highway was being blasted from Kunming south – we actually travelled along the last remnants of the Burma Road from 1942 – it’s all gone now under three lanes of freeway both ways). The movement of people even back then was simply overwhelming. Rural train stations were like scenes from Soylent Green – people simply overflowing out of the buildings as they waited for buses or trains into the cities. Polcie would stop our buses every 20 km or so and check all the Chinese residency permits – if they were heading for the cities but were classed as rural residents tehey were turfed off onto the side of the road (any time of day or night). Presumably they then climbed onto the next bus or train that came along…

There was an episode in Beijing about a month ago where a young women fell off a shopping center in an apparent suicide. Since she was a migrant from Anhui, conspiracies began to circulate among the Anhui community that she had been pushed off after being raped, with a certain corrupt government official as a likely culprit. The whole thing culminated in several thousand people marching on the shopping mall in protest, and the police were eventually called in to suppress the demonstration. The whole thing has kind of fizzled out since then.

That kind of seems like a common trend with a lot of issues related to migrant workers. China’s system of land acquisition and hukou make tons makes room for tons of abuse, grievances, real or imagined, snowball into bigger controversies which burns hot for a little while and then fades away. The problem is that while things like the Hukou system cause a lot of problems for migrant workers, it also makes it kind of impossible for them to get invested in solving any of those problems. Why should they care about poor working conditions and corruption in towns that they’re eventually going to have to leave anyways? That’s part of the reason an independent labor movement has had such a hard getting traction. It’s also part of the reason why the system remains, it’s too convenient as a means of stifling opposition and maintaining stability.

It’s impossible to say what the central government thinks about this, but it’s not difficult to imagine that fairly soon they’re going to figure out things like the Hukou system are more trouble than their worth. They exacerbate regionalism, aid local corruption and make implementing a system of government provided social insurance much more difficult.

“since it drives much of the demand for steel, and therefore iron ore and coking coal, that has underpinned our amazing run of good economic fortune,”

Quite where the exact point is is unknown but that there is such a point is known. That at some point there’s enough infrastructure of a society containing enough metal to provide a significant portion of the metal for the next generation of infrastructure. At which point the net consumption of ores starts to fall. For the new infrastructure is built out of what is recycled out of the old.

This is partly to do with actually having an completed infrastructure and partly because as technology advances we become more efficient in our use of, say, a tonne of iron or steel.

As an example it’s generally assumed that no one will ever build a blast furnace (iron ore into iron and then steel) again in the advanced countries. And the reason that many of the extant ones are closing is not that the demand for steel is falling so much as the provision of new steel is coming from the recycling of old. One example is the Mitall plant at Florange in France. They’re keeping the rolling mills (to turn raw steel into sheet) but closing the blast furnaces. The mill being supplied with reprocessed scrap instead (and Nucor’s entire business model is based on scrap reprocessing).

The point at which Australia will feel the pain is not so much when China stops building: but when they start building the new out of the remains of the last generation. Some time yet I would guess but that is the point at which coking coal and iron ore will fall in price.

The insistence on maintaining the hukou system has always seemed curious and contradictory to me – so much of Chinese policy seems to be based on the (probably correct) assumption that creating a network of mega-urban areas is the best way to keep economic growth going. While the CCP has been admirably pragmatic in choosing its economic models, they do seem to be keen students of mid-20th Century economic geographers. Given how much resentment the hukou system causes there has to be a good reason for keeping it (not least because I’m sure urban business owners would love a free flow of people to keep wages down). I’ve assumed the key reason is security – Chinese leaders know their revolutionary history and fear revolt in the cities more than anything. Keeping the poorest of the poor in rural areas probably makes sense in this context – maintaining a division between a moderately prospering urban working/middle class and a poor rural class may well be seen as a way of divide and conquer. Although I wonder if the sight of middle class urbanites rising in the Arab Spring has given them reason to ponder the wisdom of this – although they are no doubt gratified to see the risings haven’t worked out as intended.

To an extent it does seem to work. Anecdotal I know, but it always strikes me walking and cycling around Chinese cities that you don’t see as much abject poverty you usually see in other countries, even notionally wealthier ones, and there are few slums to match those in other Asian countries or South America. Dire poverty exists of course, but it is to an extent hidden behind relatively clean and orderly looking street frontages, and virtually everyone has access to reasonably clean water and power. Given the staggering scale of urbanisation over the last two decades, that is quite an achievement, especially when you contrast it with other fast growing middle income countries.

As to changes to the social welfare system, I think surprising progress has been made, although I’ve struggled to find any English language sources which discuss it in detail. Some Chinese friends of mine have said that their parents are now able to gain public medical and retirement benefits that they would previously have been unable to get (and these are friends who would be very loath to say anything good about the government). They are not generous benefits, but for many, its enough to take the fear out of old age and sickness, a particular problem now so many families have only one off-spring to rely upon in their old ages. Its still common though to see dignified public protests by older people at a loss of pensions from their former state owned employers.

I’m a little tempted to say that things like the Hukou system isn’t based on some unresolved biases. Historically speaking, the governments at least back to the Ming have had a tendency to see self contained, stable and perfectly integrated rural community as the ideal and dynamic commercial networks as basically parasitic and sources of instability. Certainly, the idea that your well being should depend on your work unit and the community where you live bears a lot more in common with the Neo-Confucian programs of social engineering centuries before than anyone in Mao’s generation would have liked to admit.

It’s the first time I read of this Hukou system but, reading on wikipedia, I see that also the USSR had a similar system called “Propiska”.

The most similar thing I can think of in the western world is immigration visas, with the difference that the hukou and propiska sound much more capillar and pervasive.

For what I can understand, immigration limits in the west are based on a mix of xenophoby and they-will-steal-our-jobs feelings, and are quite popular for among the already resident, so that it seems really hard to lift those restrictions in a time of crisis.

It’s the first time I read of this Hukou system but, reading on wikipedia, I see that also the USSR had a similar system called “Propiska”.

I always assumed that this was where the Chinese got the idea from. Though in the USSR the point always seemed to be that you needed some way to keep people in Magnitogorsk building tractors or Norilsk mining nickel, otherwise they’d all get the hell out and go and live somewhere nicer like Riga or Moscow or Leningrad instead. In China they’re all getting the hell out anyway, and the point of the hukou system seems to be to keep the immense migrant workforce in the cities in check – you won’t cause trouble if you are technically illegal and can be deported back to the villages at will.

I don’t think that they will get to a nationwide sytem for some time to come, partly because there are vast differences between regions but also because there does seem to be a problem of the urban Chinese looking down on the rural Chinese.

I would think that drastically higher urbanization is going to lead to increased consumer demand and more potential for civic protest. Wonder how the dictatorship thinks it’s going to address those issues?

@Anderson, they have had strongly increasing urbanization and consumer demand for the last 30 to 40 years or so, all of that time with some amount of open, localized civic protest, and always with a potential for far more unrest in the background. Until now they’ve managed, both through repression and by enough growth.

It’s possible that the system will break at some point, but any reason why that should be soon? People have have predicting the end of Chinese growth and/or stability for a long time. A bit like the end of US hegemony and the fashion breakthrough of the male skirt :)

My guess is that in a non seperated China, there would just be no welfare at all. Chinese culture is much more seperatist than the west. Empathy for others suffering is more concentrate to ones direct social environment. Going up all the way to an all China system with transfers from Shanghai to some farm province would be a huge step. The central government does not make that many decissions. Most is done on a provincial level. Their power base is in the communication between the units. When the strict seperation between the provinces is watered down and provinces start to communicate direct with each other, they lose their power base.

Then again, Chinese provinces are the size of western countries, and not the smaller ones. Europe is currently explicitly not capable or willing to institute a serious cross-border transfer system, and the Eurozone has less inhabitants than the largest 4 provinces of China.

In the west, the US is the only western place with enough widely shared empathy and widespread income equality to run a welfare system that vaguely approaches Chinese scales, and that appears to somewhat of a struggle.

Very aware that it would not work in the west either on that scale. All the more reason to believe it will not happen in China anytime soon. Large areas with free labour movement are always a risk for the welfare system. The US situation is a rather decouraging example. In a way we can call ourself lucky we have those high lingual and cultural barriers within the EU, otherwise the welfare system would have collapesed already in some countries the same way corporate taxation already did.

@Anderson 12
“I would think that drastically higher urbanization is going to lead to increased consumer demand”
@Zamfir 13
“It’s possible that the system will break at some point, but any reason why that should be soon?”
IMHO, Chinese system is based on continuous growth, that in turn is based on continuous net export to the west. If the crisis goes on enough that they are no more able to be net exporters their economy will crash, so increasing consumer demand would be the solution.
Michael Pettis is an economist who lives in China and is speaking a lot about the need of chinese rebalancing and an impending chinese boost if they don’t rebalance soon.http://www.mpettis.com/

Zamfir, I don’t predict the millennium, but China can’t do the same thing forever, anymore than any other country can. They’ve been artificially pushing down on consumer demand for a while now. Cities are good at showing folks all the shit they don’t have.

Europe is currently explicitly not capable or willing to institute an unlimited cross-border transfer system. But that’s a different issue.

It’s worth noting in this context that the gulf between rich and poor regions in China is quite a bit bigger than it is in Europe. The richest province of China is 4.7 times richer (GDP PPP per capita) than the poorest; Austria is only 3 times richer than Romania, and if we limit it to states that have been in the EU for at least ten years, Austria is about twice as rich as Hungary. For the US comparison, Delaware is about twice as rich as Mississippi. But in China, you’re talking about a country in which some parts are almost Portugal and others are poorer than Indonesia or Morocco.

Rural communities in remote rural areas were overcome by the recent earthquakes. some unreachable even though the Chinese Military were tasked to build roads for access. The state wants to have its population in city/town settlements that have main road links in case of natural disaster. 1. objections from Human Rights activists [who do not live in remote rural areas and unlikely to be women] 2. Tourism

I would indeed recommend Pettis work on rebalancing in China, especially in regards to the big picture.

In terms of urbanization, there is one aspect that has not been covered here: the connection between urbanization and real estate development, the local government fiscal situation and the financial system in China.

The 1994 fiscal reform basically moved most of the revenue to the central level while keeping expenditure on the provincial level. Simply put Chinese local government has way more expenditures than income from taxes and fees. Since local government mostly cannot borrow directly in the market with security in future tax income, the nominal ownership of land by local government has been used fill the gap. Money is raised by local government owned firms or special purpose vehicles by getting either bank loan or by having the Chinese investment banks (trust and security companies) create investment products for sale to retail and wholesale “consumers” (a large part of chinese savings is corporate savings looking for a yield).

The three element: 1) cash strapped local government that officially owns all land, 2) high demand for real estate for speculative purposes and as an investable for the middle class and 3) high demand for “safe” assets with a good yield for high networth individuals and institutional investors such as the state owned enterprises(any state connected debt is considered safe) create a virtious circle. Local government sells/morgages land to build infrastructure and create jobs for local workers, real estate developers build buildings that can be used as collateral for new loans and new construction. The government built infrastructure make the land more valuable and thus lets the real estate company have a capital gain. The financial system is able to create a well collateralized, local government supported yield above the bank lending rate, creating a safe place for the rich and powerful to place their money. And rising land values enable local government to raise more money selling land and using land as collateral for its own borrowing funding more local government spending.

So urbanization as a policy also has another function besides a long-run social goal: it validates the previously made investment made by local government which again underpins a not insignificant part of the wealth of the core party cadres (held in the official shadow banking system (trust ect.)). Local government is assumed down here to be backed by the central government, which makes – from the perspective of the financial system – local government debt “risk free”. By backing “urbanization” as the growth driver, the local government real estate/infrastructure economy is implicitly supported.

Being kind of a cynic about these thing I think the plight of migrants is much lower on the priorities of Beijing as a source of social instability than the loss of wealth by the existing urban population and the party cadres.